Australian equities – rate cut overshadows budget measures
Michael Price
Head of Australian Fundamental Equities
Investment markets are likely to overlook federal budget measures and focus on the RBA rate cut. However, at the margin the small decreases in personal income tax to combat bracket creep and cuts to small business tax will assist consumer-related sectors. Increases in tobacco excise will impact on gaming revenues and discretionary consumer spending. Increases in spending on state works and city infrastructure will go part way to alleviating the impact of a reduction in mining and energy capital expenditure.
If the government continues to increase the fiscal deficit, the longer term prospect of a reduction in Australia’s credit rating and associated impact on the Australian dollar is likely to have a larger impact on equity markets than direct budget measures.
What does this mean for investors?
The will be no acute immediate changes to markets as a result of the budget however, an increasing fiscal deficit could ultimately impact the Australian dollar and equity markets.
Additionally, changes to superannuation tax mean that tax-aware investment strategies, such as those offered by the AMP Capital Equity Income Generator, are now even more relevant to investors
Infrastructure – building confidence through infrastructure development
Michael Cummings
Head of Australian and New Zealand Infrastructure Equity Funds
We welcome the federal government’s continued focus on infrastructure investment as it will help to build even greater confidence in the Australian infrastructure sector for both local and international investors.
The national infrastructure plan attempts to address the major impediments to developing modern infrastructure and telegraphs more federal involvement. Transport reform in particular is key to stimulating economic growth by both reducing the cost of transport inefficiencies and creating more development opportunities, which is positive for investors.
We are also supportive of efforts to strengthen the links between the private sector and the federal government to create more innovative financing solutions. The private sector has an important role to play in financing the essential assets that support service delivery, enhance growth and productivity and underpin the operation of Australia’s society, and it has a lot of insights and ideas to offer.
What does this mean for investors?
Opportunities in infrastructure investment within Australia will continue to grow for local and foreign investors, particularly in the transport sector.
Fixed income – pressure for yields to push higher
Ilan Dekell
Head of Macro – Fixed Income
We are entering an uncertain period for Australia during the next six months as we face a federal election, a new RBA Governor and the possibility that the RBA will ease monetary policy further as growth remains subdued and inflation continues to surprise to the downside. It is through this lens that the budget should be interpreted.
During the past two years, economic forecasts have been somewhat more conservative, which has led to less slippage with regard to the budget undershooting the government’s forecast. Nonetheless, the economic forecasts used to project the budget into the future continue to be high relative to Australia’s economic performance over the past few years.
Once again the government has pushed the return to a budget surplus out to beyond the forecast horizon of 2020. This ongoing delay of returning to surplus will continue to test the credit rating agencies’ assessment of Australia’s sovereign risk. We continue to believe that as long as the change in general government debt as a percentage of GDP is between 0-3%, and net government debt can hold below 30% GDP, a sovereign credit downgrade can be held off.
In regards to impacts on activity and interest rates, we will be watching non-mining capital expenditure and household consumption in the months ahead for any signs of positive momentum following the budget announcement. With the RBA having cut rates, a positive interpretation may lead to improving growth and inflation expectations, and therefore see some pressure for yields to push higher.
What does this mean for investors?
Fiscal deficit means that Australia’s sovereign risk will remain under the lens of credit rating agencies.
Property – the chase for high-quality property will continue
Tim Nation
Head of Real Estate Capital
We believe the impact of the federal budget on commercial real estate is fairly benign with no ‘show stoppers’ likely to materially impact real estate markets either negatively or positively. Continued focus on infrastructure investment across the country is great news and has positive implications for real estate – both commercial and residential. The government’s decision to hold off on any changes to the negative gearing regime supports continued residential development and a correction of the long-term undersupply.
Clearly we remain in a low-growth environment and this will remain the case for the medium term, based on the government forecasts. This is likely to see continued appetite from domestic and offshore investors alike for income-producing commercial real estate where yields remain at a historically wide spread to the risk-free rate. While Australian commercial real estate is priced at historically high levels, it remains relatively cheap versus other asset classes and versus other global core property markets.
With the weight of money continuing to chase high-quality real estate and further yield compression, the focus remains on identifying assets that will be in a position to capture net operating income growth through the cycle.
For example, commercial assets with long-weighted average unexpired lease terms, let to strong covenants and offering a fixed 3% or more plus annual rental uplifts will generate defensive returns and income streams irrespective of capital markets.
Currently, we favour Sydney and Melbourne office, high-quality retail assets, and well-located industrial assets with the ability to drive net income, as offering the best opportunity for investors to capture rental growth that’s above inflation moving forward.
What does this mean for investors?
It is important that residential development continues to rectify the long term undersupply and subsequent negative impact this has had on housing affordability. But it must be the right development in the right locations where excess supply is not a risk, and will in turn adversely impact values.
Commercial real estate – office, retail and industrial – is also worth consideration as a good alternative to achieve long-term defensive income streams. Again, investors should be focussed on location and quality; a number of markets and sectors across the country offer relatively robust occupational fundamentals. The depth of capital from domestic and offshore investors alike remains strong for high quality real estate generally.
Source: AMP Capital
